Risk vs Reward is at the top of the list when it comes to making a killing in Forex trading. Many of the world’s highest paid Forex traders have win loss ratio’s close to only 50%, but they still make millions.

Why?  Because they know how to reduce and manage risk. Amateur traders are looking for systems and signals that work 85% to 95% of the time.  They don’t exist and you would be far better spending your time learning how to manage risk and trade a system that is 60% successful with a great risk management plan. Remember an incredible signal traded poorly will never beat a mediocre signal traded well.

 So why is trading such an emotional experience for most people? Unfortunately they don’t spend the time to understand risk management and to implement a risk management plan. When they do, they suddenly realise that trading Forex doesn’t need to be a nail biting experience and that a patience approach, with persistence and good money management, will see them succeed long term.

 Making a killing in Forex trading is not all about winning every trade. This is impossible and has never been achieved in the history of trading by anyone over the long term. Winning is about how you manage your risk on every trade you take. Up to 95% of Forex traders really have no idea on how to manage risk and the same amount of them fail. This is no coincidence. Banks, professional traders and institutions have strict rules and are experts at managing risks. This is the hidden key as to why they end up winning.

 So how do you effectively manage risk? You should not be risking any more than 2.5% of your trading account on any trade. If you don’t have one already you must develop a system to calculate what 2.5% actually is every time you trade. CAUTION. Don’t take another trade with live money until you understand and can systematically calculate this!!

 This is critical information for you.  If your account is based in USD (for this example if your account is in another currency it does not matter the same principle applies) then you must understand that you are not always trading in USD.

 For example, if you take a trade on the GBPUSD (the first pair is always the base currency) using a standard 1.00 lot size, the risk on a 25 point stop loss is significantly different to the same trade taken with the same lot size on the USDJPY. 

 You must strictly calculate the following before you enter a trade:

What is your account balance?

What is the base currency rate vs the currency your account is held in?

 Then calculate what volume you require to ensure you stay within your risk tolerance.

 You will need to do this on the run every time you trade and have the time to do this.

 Below is a calculator you can use on every trade you take. I simply fill in the grey boxes and it will tell me the exact volume to trade and to ensure the stop I am using for the trade keeps me within the 2.5% risk.  If you do not know how to calculate risk, please visit www.ltggoldrock.com 

 

 

Account size AUD	Risk 2.5%	EUR vs AUD rate
$100,000	$2,500.0	1.56
Account size EUR	2.5% Risk	Stop loss required	Volume allowed for stop required
64,103 €	€ 1,603	25	64.10

 

 Most people associate a bigger stop loss with more risk. This is not necessarily true, as you can adjust your volume to ensure you still stay within 2.5%. In other markets, such as Eminis or Futures, you cannot do this as lot sizes are set in most cases and this is why I prefer the Forex market as a trader. For example , you can  

trade with a 100 point stop loss and yet still risk the same money as a trade with a 25 point stop loss no matter what base currency.  Remember, this is the risk not the reward.

 The reward must be equal to the stop value and if you are scaling out you must understand precisely what profit target you need in order to cover your risk. You might think that this sort of work is time consuming and an unnecessary effort but if you want to be a winning trader you must know that your competitors, i.e. banks and professional traders, use some of the strictest risk management systems on the planet and is the reason why they are so successful. Their traders are accountable on every trade they take and they must follow a professional structure. Once you get used to trading this way you will never trade any other way.

If you want to make Forex a career and enjoy the same returns banks do in Forex trading, then start to manage your risk as they do. You can make a killing as a Forex trader and get rich, very rich, slowly! You will surprise yourself if you use this approach. Getting rich slowly in Forex is a lot more profitable than trying to get rich quick. Don’t go for broke from day one and don’t waste your time and money in Forex trading trying to do it quickly, it will eat you up and spit you out. Understand ‘risk and reward’ and make it part of your trading plan and you will join the winners!

 

 

 

Tags: Making money, Money management, Profits